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How to Effectively Do Bookkeeping for a Law Firm Tips from an Accountant and Bookkeeper

So, for example, if a law firm provides services to a client in December but doesn’t receive payment until January, the accrual method would require the firm to record the revenue in December. Setting and sticking to a budget is essential to keeping track of your business finances. By knowing your expenses and revenues, you can make sure that you are not spending more than you are making. In addition, using software like Clio Manage to keep your financial records up-to-date can be a huge time saver. The purpose of bookkeeping is to provide an accurate record of financial transactions so that informed decisions can be made and business compliance with rules and regulations is maintained. While other CTAs earn interest for clients, IOLTAs send the interest to state-sponsored programs that fund law school scholarships and law services for the poor. Fortunately, most accounting concepts for law firms are relatively straightforward.

Managing client funds is obviously more nerve-racking than managing your own, as the money isn’t yours. It’s all the more reason to ensure that you’re keeping accurate financial records.

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Understanding what goes into accounting is essential; you still are not an accountant or a bookkeeper. Bringing in an expert will give you peace of mind knowing that your business will get tax seasons done right. Having people come in and help provide their expertise in accounting and bookkeeping will help you see that it is being taken care of accurately and ethically. The Chart of Accounts is where you track transactions with your firm’s financial accounting information.

• It’s a lot like businesses that engage a law firm for their needs instead of hiring an in-house lawyer.
• Accrual accounting gives you an idea of what income and expenses you have during a period of time, but doesn’t give a good picture of your actual cash flow.
• As a result, many lawyers can avoid a lot of trouble by electing the cash basis.
• Before the firm files its first tax return, it must select its method of accounting.
• It even uses Legal Electronic Data Exchange codes to simplify billing.
• You can only move CTA funds into your business operating account after your client approves an invoice.
• Bringing in an expert will give you peace of mind knowing that your business will get tax seasons done right.

Everyone from your bookkeeper to your CPA and the IRS needs you to keep documents proving the income, credits, and deductions you put on your tax return. Bookkeeping tasks are ongoing and can be performed daily, weekly, or monthly. Whether you do the task yourself or outsource it to a pro, the goal is to make sure your books are accurate, up-to-date, and useful to you and your CPA. Ask a CPA to help you determine which accounting method is best for your business, and stick with it.

Hire a CPA

You can also make a difference in your firm by creating opportunities for financial growth. Having an activity statement that shows your starting balance, deposits in, payments out, and the ending balance is the Client Trust Ledger. Retainer agreements can get complex, but I don’t need to tell you that. The differentiating factor for accounting is whether there are contingencies or refundability clauses in the retainer contract.

• If you’re using the wrong credit or debit card, it could be costing you serious money.
• Making it easier to conduct three-way reconciliations of accounts.
• Unless the IRS requires you to use the accrual method—for law firms, this rule only kicks in once you start making $10m a year—which method is best will depend on your accounting needs.
• We understand the juggling act you are trying to maintain, between trying to be a lawyer and managing the firm’s finances.
• In short, bookkeepers provide accountants with the information they need.
• This is fine but look closely at the outstanding items to ensure they aren’t an incorrect ledger entry.
• We will introduce the basics of accounting and bookkeeping as it pertains to law firms.

Before you decide on a piece of legal practice management software, make a list of things that are important for you in a software solution. There are four subscription levels which means that you can start small and upgrade to a higher plan as your business grows. In addition, Clio integrates with a good deal of third-party apps, including QuickBooks Online and Xero.

Set up payroll

Using a 3-way reconciliation is a great way to check and verify your financial data periodically. The bookkeeping system that every entry to an account requires corresponding opposite access to a different accounting. This is a double-entry system, so there are two equal corresponding sides at all times. Double-entry accounting can create a balance sheet made of equity, liabilities, and assets. A, IOLTA, or trust account and a trust liability account, should also be included in the chart of accounts for the owner of a law practice. If proper attorney bookkeeping occurs, then the law firm can track what money is coming in and going out of your firm.

It’s best to work with a CPA who has experience working with law firms. Any CPA should be willing to sit down with you for a free consultation. Know that your firm’s day-to-day transactions are being accurately recorded to ensure smooth operation of your firm as a business. Anyone who has started a business has been guilty of this mistake. Intermingling expenses isn’t a fatal mistake but it causes problems for your business when it comes to claiming expenses and tracking the financial health of your business.

When an invoice is paid, you must first allocate the payment to the incurred cost. Nevertheless, many attorneys fail to separate revenue that covers incurred costs from their actual income. Failure to allocate appropriately can lead to inaccurate books, and battle compliance issues. Accounting for law firms may be new or challenging to you, but it doesn’t have to be scary.

This is fine but look closely at the outstanding items to ensure they aren’t an incorrect ledger entry. It’s important to adhere to best practices, or you may accidentally commingle funds and put your firm at risk. As rules vary by state, be sure to consult your state bar association and a professional law firm bookkeeping accountant to ensure that you’re following the proper protocol. Irvine bookkeeping offers you comprehensive, cost-effective, and long-term law firm bookkeeping solutions. With our dedicated and experienced bookkeepers, you potentially transform the financial management of your law firm.